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In the beginning – A quick history of Outsourcing

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Though outsourcing, BPO and shared services were not fully recognised as business strategies until the late eighties, its history has much longer roots, going back as far as the Industrial Revolution of the eighteenth and early nineteenth century.

History of outsourcing - 19th century factoryEver since the Industrial Revolution and the evolution of capitalism businesses have sought new ways to exploit their competitive advantages to increase their markets and growth[1].It meant sourcing the right materials and components at the most cost effective price and managing the processes to deliver the final goods and services to market.Companies have always sourced materials and components from other companies for their own manufacturing and processing needs.

In the nineteenth century railway companies relied on steel manufacturers, component manufacturers and tool makers to construct locomotives.

The 20th century saw the emergence of large integrated and global corporations that controlled and owned their assets, requiring multiple divisions and departments with complex and multi-layered management structures.

These corporations became lumbering giants with rigid and over bloated management structures that lacked the agility to address challenges in their markets and to exploit emerging opportunities. Strategies emerged where companies focused on their core business which entailed identifying which processes were critical to the company and which ones could be outsourced.

The stage is set

Outsourcing was not formally recognised as a business strategy until the late eighties. In the 1990s, as organisations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not deemed to be mission critical.

Organisations contracted with emerging service companies to deliver accounting, human resources, data processing, internal mail distribution, security, and plant maintenance. Outsourcing components to affect cost savings in key functions was another area to improve their finances.

The model of the vertically integrated and self-sufficient organisation has been further challenged by the speed of technological change and intense competition. Increasing expertise and specialisation required for different operational activities[2] makes it impractical for one organisation to maintain “best practice” across every facet of its operation.

New business functions

The use of contact centres and telemarketing rose to prominence at roughly the same time as outsourcing. It made sense for companies in bringing on board or trialling a new business function or strategy to use outsourcing to deliver that functionality. Most local Australian BPO providers such as UCMS (now Aegis) and Salesforce started with voice work in the 90s, managing call centres and a range of customer service functions for service organisations such as banks, airlines and telecommunication providers.

More recently, with the rise of Social Media and big data analytics, outsourcing and BPO providers were very quick in establishing practices to offer their clients services in these areas.

Offshoring

Crucial in shaping the outsourcing, BPO and shared services industries is technology. Technology makes most of the work done by an organisation placeless. And if the work can be done anywhere then it can be done by anyone.

Off-shoring non-core activities to overseas locations, typically Western corporations outsourcing to developing countries with lower labour costs, became practical.

When off-shore outsourcing began, the outsourcer’s biggest focus was cost-saving. So businesses outsourced their non-core activities and sat back to watch their processes being taken care of in off-shore destinations, while they saved phenomenal costs. This characterised BPO 1.0 or the “lift and shift” generation, which was all about identifying low-cost locations and shifting the non-core processes.

The experience of India and Ireland

Both India and Ireland saw the opportunities to kick start their economies through outsourcing.

The outsourcing of IT and services to India started in the eighties, but it really took off in the mid-nineties due to advances in technology and communications. The new telecommunications infrastructure and the Internet significantly reduced the cost and risk of working with distant colleagues. Second, the demand for technical and other services exploded. Western firms now had the ability to go offshore and a huge demand for new talent[3].

With a large, English speaking, educated and low cost workforce, India was well positioned to take advantage of the trend and the sector grew at astronomical rates. The Indian government invested in educating and up-skilling its people, while creating an economic environment, through incentives and liberalisation of local markets, to encourage overseas investment.

Some of the earliest players in the Indian outsourcing market were Texas Instruments, American Express, Swissair, British Airways and GE, who started captive units in India. The early 2000s saw growth of 40-50% per annum in the Indian outsourcing sector. Depending on whose figures you us, the value in services provided by the Indian Outsourcing and BPO industries, is somewhere between $US 10 – 30 billion per annum.

But what it has contributed overall, to the Indian economy, supporting industries and wages, has been immense.

Ireland’s economic boom of the late nineties was fuelled by a number of factors, but outsourcing, particularly contact centres had a substantial impact on that growth. Many US corporations setup their European Headquarters and service centres in Ireland because:

a)   A favourable time zone difference allowed Irish and British employees to work the first part of each day while US workers slept. b)   US firms were drawn to Ireland by cheap wages compared to the UK and by the limited government intervention in business compared to other EU members. c)   Irish workers could communicate effectively with Americans, especially compared to other low-wage EU nations such as Portugal and Spain.

The Outsourcing and BPO story continues

Following on from the success of India and Ireland, outsourcing has spread across the globe, to include Africa, South America, Eastern Europe and the Asia Pacific region, generating prosperity and opportunities for numerous countries and regions. The level of choice for locations, solutions and providers has exploded over recent years.

And rather than focusing purely on price, more and more organisations are looking for solutions and relationships that add flexibility and strategic value. Areas previously thought of as “off-limits” such as R & D and product development are now being outsourced.

The high value outsourcing segment is growing.  A recent article in the Economic Times from India, highlighted how a range of high value niches have emerged, such as fraud and risk management for financial services, data analytics and statistics for geo-spatial cartography, aerospace engineering, and so on[4]. In these areas companies are not outsourcing entire business processes or functions, so much as utilising it to add incremental capacity. In these areas, employees with MAs or Phds often need to be recruited.

Technologies such as cloud computing, big data analytics and social media, will continue to redefine how companies and their outsourcing providers manage their resources and communication channels to deliver goods and services to market.

Outsourcing is now an indispensable part of the global economy.

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